Management Accounting

Bristol’s Former CFO Indicted

Drugmaker Bristol-Myers Squibb will pay $300 million and implement governance changes as part of a deferred-prosecution agreement.
Stephen TaubJune 16, 2005

Two former executives have been indicted for their roles in an accounting scandal at Bristol-Myers Squibb Co., and the company has agreed to the terms of a deferred-prosecution arrangement, according to Christopher J. Christie, U.S. Attorney for the District of New Jersey.

Frederick S. Schiff, former senior vice president and CFO, and Richard J. Lane, former executive vice president as well as the president of the company’s Worldwide Medicines Group, were charged with conspiracy and securities fraud for allegedly planning and executing a “channel stuffing” scheme to meet internal and external sales and earnings targets, according to the U.S. attorney.

Throughout 2000 and 2001, according to Christie’s office, Bristol-Myers used financial incentives to entice wholesalers to buy and hold greater quantities of prescription drugs than demand warranted. By the end of 2001, this channel stuffing resulted in nearly $2 billion in excess inventory at the wholesalers.

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In addition to artificially inflating sales and earnings, the indictment alleged that Schiff, Lane, and “their co-conspirators” signed Securities and Exchange Commission filings with omissions of material fact and misleading information regarding sales and earnings performance; gave consistently misleading information about earnings and inventory in press releases and conference calls with Wall Street analysts; and employed accounting and bookkeeping gimmicks to mask the increasing rise in drug inventory levels with wholesalers. They also ignored concerns expressed by company employees about the use of financial incentives to wholesalers, at a cost of tens of millions of dollars.

Schiff and Lane face maximum penalties of 15 years in prison and a $1 million fine, according to Bloomberg, citing prosecutors.

Separately, a criminal complaint was filed in the District of New Jersey charging Bristol-Myers with conspiring to commit securities fraud. As part of a deferred prosecution agreement, the company has agreed to accept responsibility for its conduct, pay $300 million in restitution to victims of the fraud scheme, adopt internal compliance measures, and cooperate with the ongoing criminal investigation.

The $300 million payment brings the total that the company has paid to shareholders harmed by the fraudulent conduct to $839 million. That amount includes an earlier consent agreement with the SEC to pay a $100 million civil penalty and an additional $50 million shareholder-fund payment, as well as money paid by the company to settle two class-action lawsuits.

The Department of Justice added that it has agreed to defer criminal prosecution of Bristol-Myers for 24 months. If at the end of that period the company has fully complied with its obligations under the agreement, the criminal complaint will be dismissed.

“We balanced the need for punishment with an acknowledgment that this company provides great value and that its work should continue,” said Christie, in a statement. “At the same time, we have compensated the victimized shareholders and are prosecuting individuals responsible for the fraud [at Bristol-Myers]. This approach meets the needs of justice, sends a deterrent message to others and does not cause undue harm to an otherwise outstanding company, its shareholders and employees.”

Bristol-Myers will be required to appoint a current member of its board of directors, James Robinson III, as non-executive chairman, to ensure that the company “emphasizes openness, accountability, and integrity in corporate governance.” The company must engage an independent monitor, former U.S. Attorney and federal judge Frederick B. Lacey, who will monitor Bristol-Myers’ remediation efforts and report to the Justice Department on a regular basis. And the company must appoint an additional non-executive director acceptable to the U.S. attorney’s office and the Bristol-Myers board within 60 days.

In its own statement, Bristol-Myers chief executive officer Peter R. Dolan said: “The company is very pleased to have reached this resolution with the U.S. Attorney. We are determined that the mistakes of the past not be repeated and that the company’s reputation for adhering to the highest standards of ethical business practices be fully restored.”

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